Is Yahoo! Being Prepped for a Sale?

Includes: GOOG, MSFT, YHOO
by: Ashkan Karbasfrooshan

Over the past 12 months, a lot - and we mean a lot - of Yahoo!’s (NASDAQ:YHOO) senior management has left. Most have resigned, but beneath the veneer you sense that many were shown the door. Frankly, the pace of departures accelerated after former Chairman and CEO Terry Semel left the company and was replaced with Chief Yahoo! and founder Jerry Yang.

Yesterday, on New Year’s Eve, one more Chief Something leaves. Interestingly, at a time when Google’s (NASDAQ:GOOG) rank crossed 15,000 Googlers and the smartest and savviest are rightfully praising Mountain View’s dominance, you have to wonder if Google is embarking on the same hubris filled march towards bloatedness, which online is the sure fire path to destruction.

When the previous rumor of a Microsoft (NASDAQ:MSFT) / Yahoo! merger - rather, acquisition of the latter by the former - sent Yahoo!’s stock up 18% in one day (only to settle back down after the management of the two respective firms jointly kiboshed the rumor), one of the many explanations for the dead deal was the lack of role for Terry Semel in the joint! empire.

I personally doubt that storyline, for Semel would have probably welcomed an union that would have sent him riding in the sunset as a hero to shareholders. But the fact remains, a joint! unit would create a lot of redundancy at the top. I think that Microsoft invests a lot in and and has many shining stars there, but Yahoo!’s management would have been more vocal and in the limelight… which would have made things tricky in a merger because despite Yahoo!’s superior pedigree online, the fact would be that MSFT would be buying Yahoo! and as such, MSFT’s upper management would have to come out on top in the union.

I admit this is not always the case, and sometimes buyers pay a premium for talent… but no one buys excess fat and unnecessary layers of management… which is one of Yahoo!’s main problems.

I personally think Jerry Yang’s soul-searching - both as Chief Yahoo!, CEO and largest individual shareholder - has made him realize one of two things:

  1. Now that people are actually reporting to him, unlike the Semel era where no one did (!), Yang is probably intent on cleaning shop. When your stake in a company is worth $8B or so - but could easily be $10B if not $15B - you pay a bit more attention to who does what. My gut says that under the Semel regime, a lot of people had no idea who did what and who was actually responsible for what. This is really not a knock at Mr. Semel, who did clean up shop at Yahoo! when he joined back in the day… but as Yahoo! grew and got bloated, it was time for a change. A cynic might suggest that all of these people leaving is a negative sign for Yahoo!, but a realist would ask, are these not the same people who so let Yahoo! slip? [I’d argue that Yahoo! remains pretty strong in all areas apart from search… but who has not lost in search to Google?]
  2. A sale to MSFT (or maybe even News Corp. (NASDAQ:NWS), for that matter, or a spinoff with NBC, or a private equity firm) is not so bad, because it will allow Yahoo! to get away from the short-term mindset of public shareholders, which is proving to be Yahoo!’s biggest Achilles' heel: looking cute next to Google, whose bosom only seems to expand and shine brighter under Wall Street’s auspices.

Maybe, he has come to grips with both #1 and #2… and is doing #1 to set up #2.

I could be,very wrong. But if you consider where talks (assuming talks were held, indeed) were left off in Redmond, I presume one area of improvement was to clean up (read: lighten) Yahoo!’s senior ranks to make a merger easier to integrate.

After all, it’s cheaper to part ways with upper management now than it would be after a merger where employees know they have an upper hand. Nothing like a conspiracy theory to start off 2008.

Full Disclosure: Long YHOO stock.